SBA 504

What does it mean

SBA 504 is another program within the Small Business Association (SBA).  It is designed to finance long term fixed assets such as equipment or real estate.  Unlike the 7a program where the government provides the bank a loan guarantee, but the bank funds the loan, under the 504 program, the SBA directly funds a portion of the project.  Under a typical project, the total project is funded 50% by the bank in a 1st lien position, 40% by the SBA in a 2nd lien position, and the borrower is required to come up with 10% equity.

In a 504 loan, the borrower receiving the following benefits:

  1. Lower down payment required
  2. The SBA funded portion has a low long-term fixed rate

In a 504, the bank receives the following benefits:

  1. Strong collateral position
  2. Ability to offer the borrower an attractive ‚Äúblended‚ÄĚ interest rate due to the lower 504 rate


Why does it matter

SBA 504 is uniquely able to provide benefits to both the customer and the bank.  The customer is able to receive more financing with a smaller down payment, and a large share of the financing receives a long term fixed rate.  At the same time, the bank receives a low risk loan due to the strong collateral position as well as the ability to offer a below market interest for the whole project due to the lower interest rate on the 504 funded portion.  

Of the two SBA programs, the 7a program is not designed to prevent loss, it just takes the sting off of a loss when it happens.  In the case of a 504 loan, this program has the ability to prevent a loss due to the initial strong collateral position received by the bank.


Other Relevant Terms

  • Loan Structure
  • Small Business Association (SBA)
  • SBA 7a
  • Return to Terminology Library

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Greetings! I'm Clay Sharkey, and there is nothing I like more than assisting others in achieving their goals. I firmly believe that by enhancing a banker's understanding of their customer's' business, they can provide superior service. This superior service, in turn, leads to stronger relationships for the bank, improved performance for the businesses, and better experiences for our communities.  Win-win-win.